Responding specifically to the European Commission's call for advice in December 2013 on potential ways of promoting a safe and stable securitisation market, the European Banking Authority (EBA) has released a Discussion Paper which proposes a set of criteria to distinguish between transactions that are "structurally risky" and those that are "simple, standard and transparent", with the regulatory treatment incorporating a distinction between 'qualifying' securitisations and 'other' securitisations. Beginning with an overview of the current state (and historical performance) of the European securitisation market, the EBA then outlines the vast array of regulatory reforms that have been introduced in the securitisation space since 2009, contrasts the treatment of securitisation with that of covered bonds (and other secured investment products) and reviews the likely impediments in the post-crisis European securitisation market. Providing a comparative review of approaches to the capital treatment of securitisation (versus covered bonds and corporate, retail, SME and residential mortgage exposures), the EBA notes that the capital treatment of securitisations should be calibrated to reasonably conservative standards but should be broadly consistent with the capital requirements for the underlying portfolio. Defining qualifying securitisations should involve a two-step approach involving: (i) the transaction meeting a set of criteria that ensure simplicity, standardisation and transparency; and (ii) the underlying exposures meeting a minimum credit quality. The EBA makes six recommendations to promote a safe and stable securitisation market (which specifically apply to term transactions and not ABCP):

  • A holistic (cross-product and sector) review of the regulatory framework for securitisation and other investment products;

  • The creation of a framework for simple, standard and transparent securitisations;

  • The development of criteria defining simple, standard and transparent securitisations. The EBA's proposed criteria, comprising a detailed set of 22 criteria within a 3-Pillar structure, may be broadly summarised as follows:

    • Pillar 1: Simple securitisations (should be 'traditional' securitisations as defined in the Capital Requirements Regulation (CRR), and not "resecuritisations"; they should not be characterised by active portfolio management on a discretionary basis; they should be characterised by true sale and not include severe insolvency clawback provisions (confirmed by legal opinion); they should be backed by homogenous pools of exposures that meet further criteria; they should not include exposures subject to disputes, defaults or to credit-impaired borrowers; and at least one payment should have been made on the underlying exposures);

    • Pillar 2: Standard securitisations (should fulfil the risk-retention rules of the CRR; they should mitigate interest rate and currency risks; referenced interest rates should be based on commonly encountered market interest rates; transaction documentation featuring a revolving period should include specific provisions for early amortisation events; payment priority should be clear on the occurrence of a performance-related trigger; the documentation should specify the obligations of the trustee, servicer and other service providers, and contain provisions relating to an "identified person" with fiduciary responsibilities; and the management of the servicer should demonstrate expertise in servicing); and

    • Pillar 3: Transparent securitisations (should meet the requirements of the Prospectus Directive, Article 409 CRR and Article 8b of the EU Regulation on Credit Rating Agencies (disclosure to investors); investors should have access to all underlying transaction documentation; the documentation should provide clear definitions, remedies and actions relating to delinquency and default; the transaction should be subject to mandatory external verification; investors should have access to default data and historical loss performance, as well as loan-level data on underlying assets; and investor reporting should occur at least quarterly).

  • The development of criteria defining 'qualifying' securitisations. The EBA's proposed criteria identify both qualitative and quantitative conditions ensuring that underlying assets meet minimum levels of credit quality. These are: that the underlying exposures should be originated in accordance with sound and prudent credit-granting criteria; the largest aggregated exposure to a single obligor in the pool must not exceed 1% of the aggregate outstanding balance (to comply with large exposures rules and ensure granularity); the underlying exposures must be to individuals or undertakings resident, domiciled or established in the EEA; they must meet certain maximum risk-weights; and loans secured by lower ranking security rights on a given asset should only be included if all loans secured by prior ranking security rights on that asset are also included in the securitisation; 

  • Differentiated capital requirements for 'qualifying' securitisation positions versus other securitisation positions; and

  • The development of a set of Principles on the implementation of a regulatory treatment for 'qualifying' securitisation positions.

The EBA also specifically recommends that capital charges for (qualifying) securitisations be lowered from the latest Basel Committee proposals (see the Feature Piece in Edition 8 of this SCM Briefing for a detailed summary of the Second Consultative Document), and that a systematic review of the entire regulatory framework for securitisation transactions be carried out, specifically comparing it to other frameworks such as that applicable to covered bonds. The European Commission is due to issue a further, formal communication on the concept of "High Quality Securitisation" in due course, which may take into account some aspects of the EBA's proposed criteria for 'qualifying' securitisations, and is likely to inform the next round of proposals on the Basel III capital treatment of securitisation transactions. Comments on the EBA Discussion Paper (including views on the specific questions set out at Section 8) are requested by 14 January 2015.

Useful links:

European Banking Authority Discussion Paper